The following diagram shows how a family bakery is planning to pay for a second oven. The oven costs £24 000 and is needed before a contract to supply hotel...
Question 1 Report
The following diagram shows how a family bakery is planning to pay for a second oven. The oven costs £24 000 and is needed before a contract to supply hotel customers begins in six months. The bakery has saved £8 000 from profit. Its supplier offers hire purchase, with a £4 000 deposit followed by monthly payments over three years. The owner can also ask relatives for a loan. She wants to use finance that allows the business to keep enough cash for flour, packaging and other stock. She has been told that hire purchase may cost more overall than paying cash.
(a) Which option lets the bakery obtain and use the oven while paying for it in instalments? [4]
(b) Which two features distinguish a family loan from retained profit? [6]
(c) Which combination of finance should the bakery select? Explain your answer. [10]
Answer Details
(a) Hire purchase lets the bakery obtain and use the oven while paying in instalments. [4]
(b) A family loan normally has to be repaid [2], whereas retained profit belongs to the business and is not repaid. [1] A loan may charge interest or have an agreed rate [2], whereas retained profit has no interest cost. [1] [6]
(c) The suitable combination is £8 000 retained profit plus hire purchase for the balance. [1] Retained profit reduces borrowing [1] and has no interest cost. [2] Hire purchase lets the bakery receive and use the oven before all payments have been made [2], helping it meet the hotel contract in six months. [1]
Only a £4 000 deposit is needed, preserving working cash for flour, packaging and stock. [1] However, monthly payments must be affordable from future sales [1], and the total hire-purchase cost may exceed the cash price. [1] A family loan may bring personal pressure or uncertain terms. [1] [10]
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